Lessons for State Government from Recent History

Reporting on West Virginia’s 1980’s economic crisis, Rick Steelhammer in the Charleston Gazette-Mail noted on October 15, 1989: “West Virginia’s economy is going through a major transformation. Coal mining jobs are not likely to reappear to any major degree. In the coalfields and factory towns most of the jobs have been lost.” His words are eerie considering our current situation. With a sharp downturn in coal, oil and gas production, and with rising budget deficits reaching a projected $500-600 million for next fiscal year, the state seems on the edge of a precipice. As a historian of the state and region, I have been asked repeatedly, are there any parallels and lessons the state government could learn from to solve this crisis? For me, the answers lie in the fiscal crisis of the 1980’s, when WV was the most economically distressed in the nation, but then emerged as a leader in economic activity in the 1990’s.

The parallels are striking. Like today, the 1980’s saw the state adjusting to globalization, automation of manufacturing, a decline in coal, and rising deficits. Seeking new answers, the state’s voters then elected a wealthy political outsider to revitalize the state’s economy. But first it is vital to describe how dire the economic situation was by 1989.

Coal and Manufacturing Job Decline

The 1970’s energy crisis helped the state’s coal economy rebound reaching 62,982 miners in 1978. However, the nation entered a recession lasting from 1979-1983, which saw the state lose 10% of all its jobs. Coal jobs fell to 35,831 (1983), and by 1995 fell to 21,602. Making matters worse was the loss of 40,000 manufacturing jobs in the decade in the glass, chemical, and steel industries in particular. By February 1983, the state’s unemployment rate stood at a shocking 21%! At least 122,000 people left the state in the decade. By 1988, the state had the highest poverty rate of 22.3%, which meant 443,000 West Virginians lived in serious poverty.

West Virginia quickly went from a place of “smokestack industries” to one dominated by healthcare, tourism, and retail sectors. This further hurt consumer spending power, as these sectors paid much less on average. For example, the average manufacturing job in the 1980’s paid $24,000 a year and the average coal miner earned about $36,000 a year. In comparison, the average service sector job paid about $12,000. These jobs also lacked decent pension and health insurance plans. With less earning power, the state’s workers were injecting less money into small businesses as well. The late 1980’s saw the expansion of the healthcare sector, and that has continued with WVU Medicine as the leading employer in 2016.

Initial State Government Response

How did state government try to address this economic catastrophe? It is here where we can draw lessons on public policies that worked and those that failed. It is crucial to examine the period between 1985-1992 covering Arch Moore’s 3rd term and Gaston Capteron’s 1st term as governor. Both sought to revitalize the coal industry, attract new industries, balance the budget, and address long-term education and pension/ healthcare liabilities.

Example of long-wall mining. Credit: Peabody Energy Inc.

Arch Moore returned to Charleston in 1985 desiring to spur economic growth. First, he sought a 30% reduction in coal company contributions to the Workmen’s Compensation Fund, saving the industry about $185 million over 5 years. Second, Gov. Moore was pressured by the legislature to get rid of the Business and Occupation (B&O) Tax, which they argued discouraged business from relocating to the state. In 1987, the B&O tax was repealed except on utilities. Finally, in an attempt to lure a Saturn automobile plant, the legislature and governor proposed substantial tax incentives under the Business Investment and Jobs Expansion Act of 1985. While failing to attract the plant, the state extended what came to be known as the “Super Tax” credits to established West Virginia businesses, in hopes they would expand hiring and modernize outdated factories. This led to about 9,000 new jobs. However, the coal industry received about 90% of the Super Tax credits. Most used the money to invest in long wall technology and other forms of automation that increased coal production, but led to more layoffs.

What these tax measures did was create a major structural revenue hole that took years to fix. Another costly decision was the state Workmen’s Compensation Fund. With the generous refunds to coal companies and forgiving debts owed, by 1992 it had unfunded liabilities of $1.2 billion. Structural revenue holes left precarious funding for public schools and teachers, state infrastructure, and the Public Employees Insurance Agency (PEIA). Those in the late 1980’s might remember the fear that showing a PEIA insurance card could lead to denied health services since PEIA had a backlog of medical debts. At one point, gas service to the governor’s mansion was on verge of being cut off due to non-payment. By the late 1980’s, West Virginia lost 70,000 jobs and had a budget deficit of around $400 million. Adjusted for inflation this would be about $774.4 million in 2016.

Governor Gaston Caperton

Similar to 2016 when the Democratic Party nominated Jim Justice, an independently wealthy, charismatic, political outsider to run for Governor, in 1988 this role was filled by Gaston Caperton. Running a profitable insurance firm in Charleston, Caperton highlighted his new ideas, business-savvy, and youthful charisma. Like Justice in 2016, Caperton ran in 1988 stressing the need to improve education, increase teacher pay, promote “economy in government” bureaucracy, and both declared total opposition to raising new taxes to deal with budget shortfalls. Caperton spent $3 million of his own money and won handily by 115,000 votes.

Caperton’s plan was controversial for the time when he called a special session to start January 25, 1989. His plan included reorganizing state government agencies and a $392 million tax increase (still the highest in the state’s history). This was raised through an extension of the food tax to 6% and an increase of the gasoline tax by 5 cents/ gallon. Caperton’s reorganization plan consolidated dozens of entities under seven cabinet level departments, which greatly aided in the functioning of the governor’s office. Fiscal austerity was the watchword of state government in the early 1990’s, as Caperton pushed in his 1990 State of the State address for a hiring freeze, reduction of 750 state employees, a plan to close four state-run hospitals, no pay raise for state workers, no new tax increases, and spending cuts for 1990 and 1991.

The most striking area for comparison today is calls by both Democrats and Republicans to drastically reform public education. While the focus now is on possibly eliminating RESAs, significant reductions to state level bureaucracy, and promoting school choice and vouchers, in Caperton’s era the key issue was the massive underfunding of public education. In 1985, the average salary for a teacher was $19,563 ($4,032 under the national average). By 1990, the West Virginia Education Association (WVEA) and other teacher unions contemplated a strike. In March, negotiations between the governor and the WVEA broke down after the legislature failed to agree on a plan to raise pay 5% and end cuts to PEIA. Starting March 7 and lasting for eleven days, the state witnessed its first statewide teachers’ strike. Legislative leaders finally acted as intermediaries to convince Governor Caperton to hold a special session. A series of public meetings and a taskforce discovered more problems: declining school enrollments, a surplus of teachers (unlike the massive teacher shortage today), the need for school consolidation, and better property tax assessments and levies. During a productive August 1990 special session, Caperton proposed the Education Reform Act setting a $5,000 salary increase over three years, a program to put computers in all kindergartens and first grade classrooms (which was later extended), and an extra $60 million in bonding for school consolidation. The bill passed overwhelming in the House of Delegates 88-4 and State Senate 31-0. The session also appropriated $42 million towards the PEIA shortfall and set up its advisory board.

Lessons
No era of the past is exactly equivalent to our present. While the unemployment rate remained high in Caperton’s first term, the state’s fiscal crisis abated. By the time he left office, WV was in the top ten of economic activity in the country. However, the turnaround benefitted from two other developments—the rebounding coal industry and the power of Senator Robert C. Byrd. By 1990, coal production finally improved to 171 million tons, the 2nd highest year to that point. Even with today’s anger at excessive EPA regulations for escalating a “War on Coal,” environmental regulations can sometimes inadvertently help the state’s coal production. The Clean Air Act Amendments (1990) sought to reduce sulfur emissions from coal-fired power plants. While many criticized the changes, it was a boon for the low sulfur coalfields of southern West Virginia, while at the expense of the high sulfur northern coalfields. Likewise, an improved coal industry increased severance tax collections. However, coal employment continued to drop during the boom period of the mid-1990’s-2008. Ever more production occurred via mechanization such as long wall mining and the growing use of Mountain Top Removal (MTR).

Key as well was Senator Robert C. Byrd’s new position as chairman of the Senate Appropriations Committee in 1989. He claimed he would attract $1 billion in federal investment by 1993 (he achieved that by 1991) by using the now defunct Senate earmark system. Byrd served as what he called the state’s “Billion Dollar Industry” attaining investments in road construction, new locks and dams, and monies to expand state parks. He built on Caperton’s education initiatives by securing funding for a high technology center at Marshall University, a clean coal technology center at WVU, the NASA center at Wheeling Jesuit University, and more federal dollars to expand computer access in public schools. And he attracted federal jobs as well through relocating offices of the Treasury Bureau of Public Debt (Parkersburg) and the thousands of jobs at the FBI’s Criminal Division near Clarksburg. Byrd’s goal was to not just rebuild but diversify the state’s economy from its single reliance on resource extraction, to one based on global, high technology sector jobs. Byrd responded to critics of his methods saying in 1997, “Few states needed more help. An earmark may be pork to some political chatterbox on television, but to many communities in West Virginia, they are economic lifelines.”

Robert C. Byrd Locks and Dam, South of Point Pleasant, WV. Credit: Army Corp of Engineers

What can we learn from this earlier economic crisis? First, major investments in education will pay great dividends in fostering an educated workforce and diversified economy. This will require improving the pay for public school teachers, as today we face major teacher shortages and layoffs in counties. Second, the 1980’s crisis highlights the need to reduce the number of structural budget holes. The severance tax of 1987 and Caperton’s 1989 tax increases helped deal with the problem. Today’s budget shortfalls are the result of the massive decline in coal, oil, and gas severance taxes, and decline in income and consumer sales taxes as well. However, they are also exasperated as the result of major business tax cuts in the mid-2000’s designed to stimulate and attract new businesses much like the “Super Tax” credits of the late 1980’s. Beginning in 2006, a series of these cuts have left holes in the budget. The corporate net income tax was cut from 9% in 2006 to 6.5% in 2014. The Business Franchise Tax was eliminated by 2015, the B&O tax was reduced, and the tax on groceries was cut from 6% to 3%, and then eliminated in 2013. Without new revenue sources or major tax restructuring, the state will only continue to face deficits each year. Fiscal austerity is necessary if the budget is out of balance, but it can lead to an over focus on the immediate shortfall with no concern about investments needed for the future. These investments in education, roads, and broadband internet are crucial to attract a younger and more diverse population to come to the state as well as spur new entrepreneurial growth for a new generation.

Dr. Gorby is a Teaching Assistant Professor and Director of Undergraduate Advising in the History Department at West Virginia University. His research focuses on the intersections of Catholic religion, ethnicity, and the working class during the late 19th and early 20th Centuries. He is specifically interested in the social history of the “new immigrants” working in the steel mills, coal mines, tobacco factories, and breweries of Wheeling, West Virginia.

As an Appalachian historian, he also examines the intersection of ethnicity and working class life in the coalfields of West Virginia. He worked for over a year conducting research assistance and consulting for the recent PBS American Experience documentary “The Mine Wars.”